Follicular cell implantation (FCI) is an experimental cell therapy for the treatment of hair loss that uses cultured hair follicle cells to induce new hair formation. This treatment is based on the demonstration that adult dermal papilla cells (DPC) retain the hair inductive capacity they acquired during hair morphogenesis in the embryo. For FCI, hair inductive cells are isolated from scalp biopsies and then propagated in culture in order to provide enough cells to generate many new follicles from a few donor follicles. Following expansion in culture, the cells are implanted into the scalp where they induce the formation of new follicles. Because the process relies on the ability to retain the potential for hair induction during the expansion of DPC in culture, we sought a consistent, reliable and easily performed in vivo assay in which to test hair induction. In this study, we describe a simple graft model that supports hair morphogenesis. The assay combines dermal cells with embryonic mouse epidermis that provides the keratinocyte component of induced follicles. The grafts are placed under a protective skin flap in the host athymic mouse where the cells will form a skin graft with hair if the dermal cells are hair inductive DPC. Using the assay, freshly isolated and cultured mouse embryo dermal cells as well as cultured dermal papilla cells from other species all induced hair formation. The induced hairs were aesthetically indistinguishable from those of the epidermal donor in length, thickness, and pigmentation, and they were histologically normal.